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Pot-Friendly Credit Union Gets Second Chance at Master Account

A credit union seeking to provide banking services to marijuana-related businesses is flying high after the U.S. Court of Appeals, Tenth Circuit, reversed an order dismissing its suit requesting a master account at the Federal Reserve Bank of Kansas City.

What happened

Denver-based The Fourth Corner Credit Union, formed to help marijuana-related businesses (MRBs) in need of financial services, applied to the Federal Reserve Bank of Kansas City for a master account in order to have access to the Federal Reserve System’s services. But the Reserve Bank denied the application, despite the fact that Fourth Corner had been granted a license by the applicable Colorado regulator.

Fourth Corner responded with a lawsuit seeking a declaratory judgment that it was entitled to a master account and an injunction requiring the Reserve Bank to issue it one. The credit union alleged violations of its due process rights and the Administrative Procedure Act.

A district court threw out the suit, finding that it could not force the Reserve Bank to violate the Controlled Substances Act (CSA) by granting a master account that would be used to serve businesses illegal under federal law. Fourth Corner—which had already filed an amended complaint in which it promised to comply with all federal and state laws in order to obtain a master account—appealed.

The Tenth Circuit reversed, albeit with each member of the three-judge panel authoring a separate opinion. One judge voted to affirm the dismissal with prejudice, while a second wrote that the complaint should not have been dismissed because the dispute was not ripe for decision; the third believed dismissal was unwarranted. The upshot for the credit union: permission to replead its case.

“By remanding with instructions to dismiss the amended complaint without prejudice, our disposition effectuates the judgment of two panel members who would allow the Fourth Corner Credit Union to proceed with its claims,” the court explained in a per curiam opinion.

In the first of the three separate opinions, Judge Nancy Moritz said the district court should be affirmed. “By its own allegations, the Credit Union would use the court’s equitable relief to facilitate illegal activity,” she wrote. “If given a master account, the Credit Union ‘intends to provide banking services to compliant state licensed cannabis and hemp businesses.’ But even if these businesses are ‘compliant’ with Colorado law, their conduct plainly violates the CSA.”

Judge Moritz was not persuaded by the credit union’s amended complaint and affirmation at oral argument that it will not serve MRBs unless doing so is legal. “[T]he Credit Union’s equivocations don’t allay my concern that the equitable relief it seeks will facilitate illegal activity,” the judge said. “After setting aside the Credit Union’s non-committal, conclusory allegations, the amended complaint tells a clear story. The Credit Union ‘intends to provide banking services to compliant state licensed cannabis and hemp businesses, their employees, [and] industry vendors.’ The district court correctly declined to facilitate this illegality.”

In a second opinion, Judge Scott M. Matheson Jr. took the position that the court should dismiss the case on ripeness grounds. Fourth Corner sued after its application for a master account was denied. But instead of reapplying for an account to alleviate the Reserve Bank’s concern about MRBs, the credit union amended its complaint to allege it will only serve MRBs if doing so is legal.

“Assuming this allegation is true, as we must, it raises ripeness concerns because this case has become divorced from the factual backdrop that gave rise to the original dispute,” the judge wrote. “As the Reserve Bank points out, the new Credit Union—the Credit Union that excludes MRBs from its membership until serving them becomes legal—is a ‘fundamentally different[] entity’ than the one the Reserve Bank turned down.”

The amended complaint left the case no longer based on sufficiently developed facts, Judge Matheson argued. “In particular, the amended complaint does not and cannot tell us whether the Reserve Bank would grant a master account on the condition that the Credit Union will not serve MRBs unless doing so is legal. … If the Credit Union were to apply again based on its new ‘only if legal’ position, the Reserve Bank may issue a master account, in which case there would be no dispute and a decision here would be only advisory. Or it might reject a master account for some other reason, in which case there may be a dispute, though different from the one that prompted this litigation. We cannot know what the facts would be, making this case premature.”

To remedy this snafu, the judge voted to dismiss the appeal as premature and remand to the district court to vacate the judgment and dismiss without prejudice.

For the second vote to vacate and dismiss without prejudice—effectively keeping the case alive—Judge Robert E. Bacharach took a different approach, writing that the district court should have presumed that Fourth Corner would follow the law, as it indicated in its amended complaint that it would obey a ruling that servicing MRBs is illegal.

Documenting the amended complaint’s multiple commitments from the credit union to obey the law, the judge said a district court could freely decide whether Fourth Corner actually intended to obey federal law at a bench trial but was not free at the motion to dismiss stage to evaluate the validity of the credit union’s assertion. “At this stage, the district court must accept as true all of Fourth Corner’s well-pleaded factual allegations and view them in the light most favorable to Fourth Corner,” he wrote. “The district court was not free to scuttle these requirements.”

The judge also took issue with the Reserve Bank’s position that Section 342 of the Monetary Control Act of 1980 creates discretion on whether to issue a master account, writing that Section 248a(c)(2) “unambiguously” entitles Fourth Corner to a master account, ensuring universal access to certain bank services and providing uniform pricing for them.

The case encapsulates the tug-of-war between conflicting federal and state laws with regard to marijuana and the uncomfortable position financial institutions are left in as they wait and see who will prevail. This uncertainty has largely resulted in marijuana-related businesses remaining “unbanked” throughout the United States. Although the Fourth Corner will get another shot at its lawsuit, the courts have made it clear that to successfully obtain a master account, the credit union will need to promise to abide by federal law—leaving it unable to serve marijuana-related businesses.